Replacing lower marginal tax rates with a tax system that micromanages what companies do

Apparently, Obama will reveal his new proposal on Monday. These guys don't understand why firms have a better idea where to invest their money than governments do.

With the job market stuck in neutral, the Obama administration is moving toward using the revenue from expiring tax cuts for the wealthy to finance about $35 billion of tax cuts for small businesses and workers, administration and congressional officials said Friday. . . .

If goal is to improve economic efficiency, tax cuts should not distort business decisions across time or between different activities. To accomplish this cuts should be permanent rather than temporary, and if the deadweight losses are to be minimized, the highest marginal rates should be cut (since these are the most distorting). Should also cut capital income taxes since capital is more responsive to tax rates than labor.
When considering these points, the temporary payroll-tax holiday is not especially appealing. It might shift new hires to the present, but at a cost of reduced hiring when the holiday expires. This future offset can also occur with a temporary investment tax credit, but the new capital is durable.
Instead of a temporary extension of the research and development tax credit, a permanent cut would be more efficient. Better yet would be a lower tax rates on investment across the board, so government is not encouraging some kinds of investments over others.

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